Accounting Failures 101: Overstatement of Account Receivables

In this new series, we will beam our search light on past and present accounting and audit failures in the financial reporting of organisations. The purpose of this is to re-educate ourselves on past failures that we need not repeat.

Background

This first episode is on the overstatement of account receivables of a company. On March 20, 2017 the Public Company Accounting Oversight Board (PCAOB) sanctioned Wander Rodrigues Teles, the former partner of PricewaterhouseCoopers Auditores Independentes in Brazil (PWC Brazil) for audit failures and violations of PCAOB rules and standards in connection with the audit of the consolidated financial statements of Sara Lee Corporation for the fiscal year ended July 3, 2010 and July 2, 2011.  

Wander Rodrigues Teles was the lead partner for PwC Brazil's 2010 and 2011 audit work on the Brazilian subsidiaries of Sara Lee Corporation, including Sara Lee Cafés do Brasil Ltda. The PCAOB found that Teles failed to adequately respond to indications that Sara Lee Cafés may have overstated its accounts receivable.

Failure

In 2012, Sara Lee restated its 2010 and 2011 financial results, citing accounting irregularities in its Brazil operations, including the overstatement of accounts receivable.

According to the settled disciplinary order of the PCAOB, Teles knew that a material amount of Sara Lee Cafés' accounts receivable was overdue and disputed by customers. He also was aware that the subsidiary was extending the due dates of overdue receivables, indicating that Sara Lee Cafés may have overstated its accounts receivable.

The PCAOB found that Teles failed to adequately respond to these risks with appropriate due care and professional skepticism, and failed to obtain sufficient evidence to support his audit conclusions.

"Faced with indications of possible material misstatements, the lead partner did not exercise appropriate professional skepticism," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations. "He repeatedly ignored information suggesting that the company's financial information was materially misstated."

In the settled order, Teles is censured, fined $10,000, and barred for two years from associating with a registered public accounting firm.

Addressing the failure

Account receivables are the money owed to a company by entities outside the company for the sale of products or services on credit. Account receivable is a financial asset and it is always reported as a current asset in the statement of financial position. As a financial asset, it is to be assessed for impairment periodically in order not to overstate the value of the receivables. In carrying out audit of receivables, a common indicator of impairment is overdue balance. A receivable balance that has extended beyond its due date or that is long overdue for almost a year or more is likely to be impaired. Such balances need to be critically reviewed with the management and external confirmations must be sought.

In our next article, we will expatiate further on what account receivables are and the requirements of the IFRS in recognising, measuring, reporting and disclosing them in the financial statements.

• PCAOB (The Public Company Accounting Oversight Board): PCAOB is a private sector, non-profit corporation established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors.

This is a new series which will be featured every month. Do you enjoy this article? Kindly share and comment. Do not forget to send in your questions, views, suggestions and corrections.

Written by Abayomi Samuel